We Can Make an Argument That the Rally Is Just Getting Started

And just like that, equities break out to new all-time highs and the big round 20,000 level gets broken on the Dow. And just as quick, the big debate in financial media becomes whether or not this market rally is justified, real or any number of other descriptions that pundits are coming up with for what is going on. When debates like this break out, it's important to realize that good capital market analysis is more art than it is science. Getting caught up in the minutiae of the moment is how one misses the big picture. With all the cross-currents of different asset classes going in different directions and even more narratives trying to explain them, the truth is there is no absolute answer. All we can do is look at price and how the economic backdrop is trending and position ourselves accordingly.

Let's take a look at the P/E for the S&P, since that's something many pundits are citing as showing the market is overvalued. Using last night's close of 2298 and the last four full quarters of GAAP earnings, the S&P is trading at a 25.7 P/E, whereas last year we were trading at 21. Does this mean that the market is overvalued or that all we've seen is multiple expansion? I don't think so. Considering that this time last year we were looking at a possible financial disaster being driven by a collapse in energy, I would say that the multiple expansion is absolutely warranted....424 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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